Opinion: B.C.'s new first-time homebuyer loans are a bad idea

The B.C. government announced last week a subsidy to risky mortgage loans. We believe that this is counterproductive and ignores basic economics. The new measure will make the housing affordability situation worse, not better, for many in Metro Vancouver. And it will do so at considerable expense to taxpayers. The loan program works against recent efforts by Ottawa to reduce housing prices by discouraging excessive borrowing.

The government will give first-time homebuyers government loans of up to $37,500 to subsidize downpayments. These loans are interest-free for the first five years, require no default insurance, and will match the buyer’s own actual downpayment. They are available for properties worth up to $750,000 bought by long-time Canadian residents who make enough money to qualify for CMHC-insured loans and earn under $150,000 per year.

At first blush, this seems like a generous offer to first-time homebuyers. The interest savings and extra financial boost to make a downpayment look helpful, all else equal. On closer inspection, though, this policy fails in three ways.

First, the plan ignores basic economics. When the supply of housing is hard to expand (“inelastic”), offering more money to homebuyers encourages them to pay more, pushing prices up. So most of the subsidy will be transferred to incumbent homeowners rather than new buyers. Housing supply is highly inelastic in Metro Vancouver because it is difficult to build new units rapidly or cheaply, given the area’s geography and strict zoning rules.

Second, this program will be expensive. The B.C. government estimates that it will disperse around $700 million in subsidized loans over three years. The cost of foregone interest and default risk will likely be over $150 million. Since much of that money will go to sellers and developers, in effect this is shuffling money from the average taxpayer toward people who are already well off. First-time homebuyers must still pay the taxes to finance the program they are ostensibly benefiting from — and renters pay the same taxes for even less benefit. In expensive places like Vancouver, renters with low incomes will not be able to qualify for the new program, so any benefits to new buyers are concentrated among current renters with higher incomes.

Third, the recent experience in the U.S. during the subprime housing crisis suggests that encouraging households with limited means to stretch their budgets in order to buy homes is very risky. Should interest rates rise and prices fall, borrowers may find themselves in trouble at the end of the “teaser rate” period for the provincial loan, when their first mortgage’s rate is likely to reset. Indeed, this is a step in the opposite direction from federal efforts to rein in Canadian households’ debt levels. The recent mortgage “stress test” rules were designed precisely to combat this kind of risky mortgage behaviour.

House prices have been falling in Metro Vancouver over the past few months, perhaps due in part to the province’s foreign buyer tax introduced in August and the new federal mortgage rules. Prior to the announcement of the new loan program, most forecasts were for continued price declines and increased affordability in 2017. This was “the impact we wanted”, as Premier Christy Clark stated in September. Why introduce a new policy that will raise prices, directly counteracting prior steps?

There are much more effective policy tools available to the provincial government if it wants to improve affordability. We and others have proposed different systems to give local tax-paying residents a better shot at owning housing relative to those who treat housing as an investment. This would involve creating a property surtax which could be offset by income taxes paid, while exempting most or all seniors. This plan would re-connect the Vancouver housing market to the local labour market, and thereby bring prices closer in line with what locals can afford. Such a measure could also generate considerable tax revenue.

Premier Clark blames local politicians for the strict zoning that keeps affordable housing units out of so many neighbourhoods. But local politicians play by rules set out by the province. The province should use its financial and political leverage to eliminate unduly restrictive zoning before it wastes tens of millions of taxpayer dollars on risky loans.

In sum, this new policy does not achieve its objectives. The benefits are concentrated among real estate investors who have already profited from the status quo. A debt-fueled demand subsidy in the face of supply constraints is bad economics, so we urge the government to reconsider.

Tom Davidoff is an associate professor at UBC’s Sauder School of Business; Josh Gordon is an assistant professor at SFU’s School of Public Policy; Joshua Gottlieb is an assistant professor at UBC’s Vancouver School of Economics.

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